What is a surety bond or security deposit insurance?
What is a surety bond or security deposit insurance? Find out why this lower cost alternative is a win win for tenants and landlords.
Are you losing money with security deposits?
You likely are. With the changes in the economy, the change in the nature of the renter, the increased costs in preparing a rental for the market, and restrictions in how much you can charge for a security deposit, the security deposit is often a losing proposition. The stock answer to screen you tenants better does not make sense. You have screened your tenants well. There is one option you may not have considered. There is a new good option for all landlords to stem the losses any landlord will face when a tenant moves out when you have to evict a tenant.
Do what the big boys with big boy pants do.
Corporations and large operators have historically had options available that they take full advantage of. How do they escape the security deposit trap? Insurance.
Insurance is not a scary thing. Certainly not in this case. It is a good thing. I will explain.
Security Deposit Insurance replaces the need for a tenant to put down and tie up hundreds or even thousands of dollars with a security deposit for years on end. For the landlord, they are a nighmare and no landlord wants to ask for large sums of money when signing up a tenant. Security deposits are an arcane principle going back much more than 100 years. In todays market, security deposits simply do not work. The good news is that there is a safe alternative that has existed in one form or another for decades. It is time to get into the game for both the tenant and landlord.
What is a Rental/Lease Surety Bond?
A surety bond is designed to protect the landlord, the tenant, and reduce move-in costs for the tenant. It is a three party agreement between the tenant, the landlord, and the bond company that assures that some of the costs the landlord may incur when a tenant moves out or violates the lease will be paid. A surety bond is affordable and allows a tenant to keep control of their own money. Surety bonds can cost between %10 and %20 of the security deposit requirement. The average is about %17.5 though this could be much lower for tenants with good credit. For example, %17.5 of a $1000 security deposit is only $175.
Surety bonds are purchased products and not refundable, however, once a surety bond is purchased, any requirement for a security deposit disappears. For the landlord, the surety bond may limit the claims that a landlord may claim depending upon the bond. Typical costs to the landlord for tenats who damage the property or moves out prior to the lease term can range in the thousands of dollars. Where a surety bond limits the claims of the landlord, it may also limit the money a tenant is liable for. Surety bonds can protect both the landlord and tenant and allows the tenant to use the remaining money to cover moving costs, purchase furniture, household goods, etc. Moving is expensive. Surety bonds make moving less costly.
There are two primary differnt bond products that I can see. There may be more of course. One is a bond on a per case basis. Another is a bond pool. Bond pools allow for larger claims from the landlord up to the value of the bond pool whereas individual bonds are limited by the bond value purchased. With a bond pool, when a bond is purchased for which there is no claim, some value, full or limited, goes into a pool which can build over time.
For smaller landlords, this pool would build slowly. For landlords with high turnover, the pool may never build up depending upon other factors such as number of units. Both have their advantages of course, however, bond companies offering bond pools will likely require a minimum number of units. Individual bonds are availble, though again, many companies require a minimum number of units. This helps guard against losses by the bond company by spreading the risk over a larger pool of bonds. Another consideration is the 5 year limit. For now, it is unclear if a lease with a shorter lease term such as one year which auto renews would be cover the landlord for only five years or if this limits the lease term to 5 years.
What is Security Deposit Insurance?
Security Deposit Insurance is very similar to a surety bond but may offer more protection for the landlord by removing some of the limits of a bond. Like a bond, this can be a one time purchase, however, some options allow for monthly premiums generally designed for high risk tenants. While security deposit insurance still has the 5 year limit that bonds have, it is not clear if this limit exists for those policies that are billed monthly. It is clear that bonds and insurance are technically different, the technical differnce is not clear. What is clear is that bond companies and insurance companies are different entities, however, some insurance companies also have divisions that offer bonds.
One differnce between bond vs. insurance is bond companies do not appear to offer higher risk vehicles where there are insurance options for high risk tenants. Often the cost for high risk tenants is much higher and can in some cases equal any security deposit requirement. For landlords that do not accept high risk tenants, security deposit insurance is still a clear choice. One advantage to security deposit insurance is that some products are available to smaller landlords who may simply have one unit.
What is common and different between a Rental/Lease Surety Bond and Security Deposit Insurance?
Any Rental/Lease Surety Bond or Security Deposit Insurance will have similar costs and limits. Both will check the tenants credit history, rental history, prior evictions, criminal history, and sex offender lists, etc. Both offer their services quickly often within a couple of hours or a couple of days. Some security deposit insurance products are available to smaller landlords where rental/lease surety bonds are generally not available. In addition, for those landlords who require renters insurance, insurance companies often offer both security deposit insurance and renters insurance with a single application and can bundle the total cost in one payment. Both bonds and insurance products can be linked or bundled into property management products which can include online rental applications, background checks, leases, and offer other automation that simplifies the process for the tenant and the landlord.
Misinformation on the web.
While researching these products, I have found several untrue and/or misleading information on the web. This seems to stem from three mindsets. One is where there is a fearful resistence to change from the traditional security deposit. The second is based upon ignorance of the offerings. The third is bias. Biases seem to be against buying a product, transfering liability from the landlord to the bond or insurance company, and general ignorance of the rental processes and offerings from bond and insurance companies. Most of the derogatory information found on the web is very old. One piece is written by a lawyer who shows an unnatural bias against landlords likely from being a tenant advocate. The plain truth is, information found on the web can be rather scant, marketing efforts, or posted by anyone who is not in the industry and just plain wrong. Be careful to take any information you find with salt. I will try and dispell the myths and clarify issues.
Does Rental/Lease Surety Bond or Security Deposit Insurance protect the tenant?
Yes. It appears to. These products can limit what types of claims a landlord can make and can limit the payout to the value of the bond or insurance policy. While landlords can file a claim, in many cases the landlord will still have to follow the eviction and/or possession proceedures required by law where the tenant has a voice. This includes any judgement that is part of that process. A tenant can dispute the claims of the landlord before a judge. Most judges decide in favor of the tenant where the claims of the landlord is not lawful or can be disputed. Even once a judgemnt is awarded, an appeal process is available to the tenant.
Bond and insurance companies require detailed proof of the landlords claim and likely requires a binding arbitration process for any tenant that disputes the charges. For the landlord, obtaining a judgement also requires detailed proof presented in person. Obtaining a judgement does not mean the landlord can persue collection of the judgement and file a claim with the insurance or bond company. A landlord can only persue one or the other, however, may seek a judgement and file a claim intending not to persue the judgement in collection. A landlord cannot not collect for double damages. That is illegal, however, a landlord can seek all avenues for recourse chosing one or the other in the end. Agreements between the insurance or bond company limits collecting double damages. Where filing a claim with the insurance or bond company limits the landlord, the landlord will have to file a new law suit to persue the remainder of any judgement a claim does not cover. Landlords may be reluctant to file additional claims in court and waste more money, time, and effort, but may for any differences between the claim payout and any existing judgement. Consult a lawyer.
In some states, the landlord can transfer the judgment to the state where is it collected by a local sherrifs office to include leins, seizure of personal property, seizure of bank funds, levies against a paycheck, and levies against real property such as a car. For the tenant, claims made to an insurance or bond company escapes these actions. Where a tenant moves out and where a landlord does not need to file in count, the tenant has the opportunity to do a final walkthrough with the landlord and dispute claims in person at that time. Not all tenants are reasonable, however, tenants are well protected simply by the limits of the insurance policy or bond and the requirements of proof and arbitration required by the company as well as any court proceedures.
Security Deposits can be invested and therefore pay for damages.
Nothing can be further from the truth! Security deposits are governed by law. Short-term leases may not require a landlord to place a security deposit into an escrow account, however, longer-term leases very likely will. Landlords cannot touch this money or redirect it in any way. The security deposit will have monthly or quarterly accounting from the bank or escrow company that the landlord must retain in order to prove that the tenant recieves all of their deposit back plus interest. The landlord cannot benefit from your security deposit other than they do have control over your money if you fail to live up to the terms of the lease or damage the property.
Paying for a product is worse than paying a security deposit.
I get the reluctance to pay for a product that has not been required before. Rental/Lease Surety Bonds and Security Deposit Insurance are new products. People resist change. However, for most tenants, the purchase of a product allows the tenant to retain control of their money rather than giving that power away to a landlord. If the tenant is a good tenant and interested in a long-term rental, then purchasing a product makes complete sense. This is because security deposts are often large amounts of money especially in larger cities where forfeiting as much as $5000 may be required. Purchasing a product can not only remove the requirement for the security deposit, but may also remove the requirement for the final month of rent. The tenant is free to use this money how they see fit while offering the landlord protection. For bad tenants, purchasing a product still makes sense. One fear is that these products will allow bad tenants to move more readily. However, this may not be true because of the background check the insurance or bond companies do.
Security Deposit Insurance is not insurance.
Nothing can be further from the truth! It is indeed insurance. It is not renters insurance which covers damages to the tenant and landlord in cases of fire or water damage or break-in for example. It is insurance that benefits the landlord by insuring that the tenant will adhere to the financial terms of the lease and law. It protects the landlord and offers the tenant another option rather than forfeiting a large sum of money.
Bond and Insurance companies do not pay quickly or deny claims.
For the industry, there is nothing new here. These claims have existed for all insurance or bond companies for as long as I can remember. However, the complaints I found so far seem to be limited to vacation rentals where the landlord does not seem to be able to prove the tenant actually caused the damage. This is understandable. Issuing a bond or insurance policy is a liability for the bond or insurance company and therefore must be proved. Landlords should take lots of detailed dated photos of the property including the tenant, if possible, in some of the photos. For a landlord, proving damages can be difficult. The same rules apply when dealing with a bond or insurance company as does in court. The landlord must prove beyond all reasonable doubt that the property has been damaged.
As well, acceptance detailed check lists should also be used. Also consider what would be normal wear and tear. Not everyone will agree on this. Some opinions are so severely limited as to contradict law, and others contradict reason. In as much as the landlord can, damages need to be proved. If possible, get a judgement in court. These steps should help. Where damage claims are not paid quickly, the complaints I have found do not mention if arbitration was sought by the tenant. Bond and insurance company contracts should gaurantee payments within a timely manner. So far I found this period to be about 30 days except where arbitration is sought. Complaints have mentioned "months". I doubt this is the norm. Otherwise, there would be no advantage for the landlord and these products would not exist.
Tenants are surprised that they have to pay for damages.
I know. Crazy huh? Pay for damages, what a concept! While damages the landlord is allowed to charge for is largely regulated by law, anything that costs the landlord over normal wear and tear is generally allowed if the landlord can prove the fact. In court, this can still be a tall order and some landlords do try and get away with charges that are unfair to the tenant. Bond and insurance companies are likely to be harder on landlords because it is a business where risk is largely measured in payouts. Still, tenants can be surprised the landlord wants damages for things like trash, property removal and storage, fist sized holes in the wall, damaged cabinet doors, broken windows, damage to the carpet or flooring, missing light covers, stains that cannot be removed, and so on. With Rental/Lease Surety Bonds and Security Deposit Insurance, nothing really changes when it comes to damages that can be charged.
Protections for the tenant still exists. However, just like for tenant landlord issues regarding security deposits, tenants generally do not avail themselves to protections they have. They simply move out and make any sins of the past the landlords problem. Well, guess what? The landlord will try and reduce their own risks by recovering the cost of repairs.
The first line of defense for the tenant is to simply return the rental in the condition they recieved it less normal wear and tear which does not include heavy soiling and damages that fall outside of repairs a landlord would normally face. While for the landlord a few small issues are not worth chasing, enough issues are. Landlords often accept some smaller reasonable damages easily. Keep in mind any rental is the personal property of the landlord and landlords do not appreciate tenants who do not respect that fact. Tenants who are respectful of their property often have no problems from the landlord.
Tenants are surprised that they have to deal with the bond or insurance company.
Again, a no-brainer. The tenant and landlord have by agreement passed part of the reposnibility to a 3rd party. While a tenant can try to settle damages with the landlord, the tenant and landlord have agreed to a process covered by contract law. While this somewhat shields the landlord from some of the process, using these products do not remove the bulk of the work the landlord must do. Landlords may appreciate a tenant trying to settle with them directly, however, I would expect that most tenants who try and settle with the landlord are looking for a solution that absolves the tenant of some or all of the costs they face. For any tenant who faces damage charges, they often have a better chance of disputing charges with the bond or insurance company or even at arbitration. Dealing with the landlord directly may not yield the same results unless the tenant is ready to pay all of the cost of damages.
Security Deposits are equal to or better than Rental/Lease Bonds or Security Deposit Insurance.
Not generally. No. The reality of being a landlord has changed. Part of this lies with the tenant. Part lies with the cost of doing business these days. Part of it is specific to the local market. Landlords are facing more damages and bad tenants especially in the past decade. Smaller landlords mostly cannot tolorate losses due to higher turnover and damages which is occuring more and more.
Some landlords are finding older tenants in their 40s, 50s, and 60s can easily be just as bad. Landlords report that in the 80s and 90s, they did not see the number of problems with tenants as they see now. Landlord costs have risen significantly in the past decade. The cost of preparing a rental returned in good shape can easily cost $500, $1000, or more. While a landlord wants to return the rental back to the market quickly, they may not be able to hire professionals to help make the process faster because of the increased costs. With increased turnover and costs, landlords are often in a bind.
A rental can easily be off the market for a month or more while the landlord prepairs the rental for another tenant. This means that even in a low cost market, a rental can represent very signifcant losses which cannot be recovered. In some areas, rent values have not risen much if at all. For many smaller landlords, the rental business has become a yearly loss for a decade now. Many have gone bankrupt or sold their properties. Even larger landlords have scaled their property holdings back significantly. Some have sold off half or more of their holdings retaining the most profitable or all of their holdings. In many markets, rental properties are not selling well and may have lost value or at least remained the same.
So what does all of this have to do with security deposits? Many markets are still weak and security deposits limited. This means that for many, security deposits cannot cover costs of damages as it is designed to do. Some states restrict security or all depostis to just one month of rent. The intent is to make renting more accessible, however, the effect may be that affordable rental markets soon find less rentals availble. This either ensures the landlord will lose money with each move-out or raise rents higher to limit the risk.
There has been an increase in tenants that simply vacate the property. Court costs and increased filing fees, long and sometimes unreasonable waiting periods, collection costs, and so on easily eat the whole security deposit long before damages are calculated. Add to that good tenants that move out thinking they can use their security deposit as their last month of rent. The reality is that unless security deposits are significant, landlords almost always lose. This is a disaster.
Bond and insurance products have become a hopefull necessity to battle these new realities. Simply put, landlords are looking for an alternative that mitigate the losses before losing their own properties which represents real monies and often their retirement. Landlords do not like asking for security deposits especially larger ones that tenants will recoil from or the market cannot support. Bond and insurance products seem to be the answer that solves problems for both the landlord and tenant.
Rental/Lease Bonds and Security Deposit Insurance represents new fears for landlords.
Let's face it, landlords are used to being targets of preditory tenants, lawyers, and negative attitudes toward landlords in the legislature, courts, and the media. Decades of reporting on a small number of bad landlords and even bad tenants has tainted the reputation of both but mostly landlords. Nearly half of all rentals in the U.S. are small operators who self report the reason for getting into the business is to help people have affordable quality housing available. Good tenants and landlords are paying for the sins of many. Good landlords do not like bad landlords. It makes the rental business unessarily difficult. Add to this, the increase in preditory and professional tenants. Many know how to take advantage of smaller landlords who do not have the same advantages the larger commercial operations have. So when a product offered by insurance and bond companies comes around, landlords are understandably very skeptical especially when there is a whole bunch of legalese involved. Landlords are used to legalese, however, being a new product, the details are in the fine print. The fear is that the details will be confusing, or not as landlord friendly as hoped. So understandably, landlords and tenants want more detail which is not immediately available.
So what are some of the questions landlords need answers to?
- How specifically do you differ from others in your industry? What is the advantage to the landlord?
- What is the ratio of claims that are paid in full versus not paid in full or denied within 30 days of filing a claim? (This is a fairly standard metric to ask for.)
- What are the specific requirements from the landlord? (Policies and proceedures.)
- What are the specific requirements from the tenant? (Policies and proceedures.)
- What are the specific criteria used to decide what is paid from a landlord claim? (A decision tree or detailed list.)
- What specific materials and professional services are covered in a claim? What are not?
- Can you supply a sample landlord agreement? (Any landlords attorney will want to review this. Anyone has the right to review an agreement before signing.)
- What are the specific proceedures and requirements for landlord claim appeals if denied or not fully paid?
- What are the specific proceedures and requirements for tenant appeals and arbitration?
- Can you supply a list of references that a landlord can call to understand better the companies performance?
- Who is the underwriter? (Insurance only.)
- Are you and your underwriter registered with the Better Business Bureau? (Look up grade and complaints.)
- What are your company financial ratings? (A.M. Best, Fitch, Moody's, Standard & Poors, etc.)
- What national and state accreditations do you have?
- Can I link directly to your tenant portal from my website that will reference my portal account to better serve my customers? (Some require an e-mail invitation from the landlord portal to the tenant. Not every prospect will have e-mail available or may be unwilling to share the address.)
Here is a short list of a some of the providers available.
- Rental/Lease Surety Bonds (All commercial.)
- Security Deposit Insurance
- Commercial
- Small Landlord Friendly
From the Better Business Bureau:
Name Accredited Rating Complaints Suredeposit No A+ 0 ePremium Insurance Agency, LLC Yes A+ 6 LeaseLock, Inc. Yes A 1 Rhino New York LLC Yes A- 0 Note: The BBB information is what I could find on 9/17/2018. The lack of BBB information does not mean the companies listed are not safe to use. I am not affiliated with nor can I endorse any of these companies or their products. I simply have no direct experience with them yet. Take your time to research these offerings thoroughly. I will update this list when I can.
